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Volatility forecasting of non-ferrous metal futures: Covariances, covariates or combinations?

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  • Lyócsa, Štefan
  • Molnár, Peter
  • Todorova, Neda

Abstract

This is the first comprehensive study on the forecasting of the realized volatility of non-ferrous metal futures. Based on 8.5years of intraday data on copper, zinc, nickel, lead and aluminum, we explore a variety of extensions of the univariate heterogeneous autoregressive (HAR) model and seek to harness the economic linkages among these metals to improve forecasts. A simple approach that augments the models with shocks in other metals’ series appears to outperform more sophisticated specifications, which explicitly model covariances. The results suggest that the information inherent in the volatility series of aluminum is most useful in enhancing the accuracy of forecasts for other metals. While consistently outperforming the original HAR model with an individual model is difficult, combination forecasts, especially with univariate specifications or Bayesian model averaging, are found to conclusively outperform the benchmark.

Suggested Citation

  • Lyócsa, Štefan & Molnár, Peter & Todorova, Neda, 2017. "Volatility forecasting of non-ferrous metal futures: Covariances, covariates or combinations?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 51(C), pages 228-247.
  • Handle: RePEc:eee:intfin:v:51:y:2017:i:c:p:228-247
    DOI: 10.1016/j.intfin.2017.08.005
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    Cited by:

    1. Steel, Mark F. J., 2017. "Model Averaging and its Use in Economics," MPRA Paper 81568, University Library of Munich, Germany.

    More about this item

    Keywords

    Industrial metals; LME futures market; Volatility forecasting; Multivariate HAR; Volatility spillovers; Bayesian model averaging;

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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